SmallBizLady: We got a new tax law at the end of 2017, but very little other tax legislation. Does that mean this will be an easy tax filing season?
TaxMama: I wish I could deliver good news. Sadly, this will be the worst filing season ever – for many reasons.
- The IRS is still trying to write up procedures for many of the law changes in the TCJA (Tax Cuts and Jobs Act).
- Congress never passed their annual “extender” bill – so many tax breaks were not extended to 2018.
- The government shutdown has severely impacted IRS services and access to information and help.
SmallBizLady: Tell me something easy – especially for small businesses – what are the mileage rates for 2018?
TaxMama: Thanks for an easy question. The 2018 mileage rates are:
- 54 cents per mile for business miles driven.
- 18 cents per mile driven for medical or moving purposes.
- 14 cents per mile driven in service of charitable organizations.
- 25 cents per mile is the depreciation on the vehicle.
While we’re at it, here are the mileage rates for 2019, so you can work on this year’s expense reports and vehicle planning.
- 58 cents for every mile of business travel driven.
- 20 cents per mile driven for medical or moving purposes.
- 14 cents per mile driven in service of charitable organizations.
- 25 cents per mile is the depreciation on the vehicle.
SmallBizLady: You mentioned that there was a good reason to put business tax returns on extension. Why wait?
TaxMama: Several reasons.
- As ever, companies are still scrambling to get all their W-2s and 1099s filed and sent out on time. So expect them to be late.
- Since the IRS is clarifying procedures, one or more of their announcements might be to your benefit.
- As I mentioned, we didn’t get an “extender bill” yet. But we probably will – and it could affect your tax returns.
- And, since there were major flaws in the new tax law, it’s quite possible that Congress will issue some legislation to correct those flaws.
SmallBizLady: Why not just file now and amend later?
TaxMama: Those 1040Xs are scrutinized by people, instead of just being processed by computers. An IRS reviewer might see other issues in that amended return – and it could turn into a full-blown audit. If you’re confident that everything in your tax return is correct, amending is just fine.
SmallBizLady: You mentioned that we should wait for the extenders. Let’s see if they are worth waiting for?
TaxMama: These tax provisions expired as of 12/31/17. It’s quite likely that only the first two items on the list will affect many individuals.
- Mortgage insurance premiums treated as qualified residence interest.
- Above-the-line deduction for qualified tuition and related expenses.
- The $500 deduction for the non-business energy credit.
- The credit for new qualified fuel cell vehicles.
- The credit for 2-wheeled plug-in electric vehicles.
- Exclusion from gross income of discharge of qualified principal residence indebtedness.
- Special write-offs for certain television and live theatrical productions.
- Certain Empowerment Zone tax incentives.
SmallBizLady: Last year, we talked about a new problem for employees with unreimbursed business expenses. Apparently, with the new tax law, they can no longer take any deductions. Did you come up with any solutions?
TaxMama: You’re right. The Tax Cuts and Jobs Act eliminated all miscellaneous itemized deductions that are normally reduced by 2% of adjusted gross income. This year, Form 2106, Employee Business Expenses, has been eliminated altogether.
Who’s affected? All outside salespeople, as well as people who use their own tools and supplies at work, and all employees who pay for these kinds of expenses, out of their own pockets: meals, entertainment, travel, supplies, education, computers, office in home, even union dues. The good news is, these deductions are not eliminated for businesses or entities – folks reporting income on Schedule C, LLCs, partnerships, S corporation and C corporations, and trusts.
SmallBizLady: For employees that will lose these deductions, is there something they can do? After all, losing deductions for, say, $25,000 of unreimbursed employee business expenses can mean extra federal and state taxes of $6,000 or more.
TaxMama: Yes, there are still three options for an employee:
- Re-negotiate their job with their employers, so the employer does reimburse them for their expenses. A good way to handle this is to use an “accountable plan” where they submit their mileage and receipts to the employer. Then the employer reimburses them. The employer gets all the deductions – and the employee doesn’t pay tax on any of those reimbursements. I have an on-demand course to teach you how to do this and how to make the increased wages fair to the employer available at http://taxmama.com/tax-quips/webinar-the-trump-tax-plan/.
- Negotiate an arrangement where they can become freelancers, under contract to the employer. That means the employee goes into business for him/herself. This can make all the expenses deductible – but the employee could lose so very much in the process. I have information about this at
http://taxmama.com/tax-quips/switching-from-employee-status-to-independent-contractor/. - Get another job with an employer who will be cooperative with step #1.
SmallBizLady: I hear with the new tax law we can’t deduct entertainment expenses anymore. What’s going on?
TaxMama: Yes. Effective January 1, 2018 – everyone, including business owners, loses all deductions for entertainment expenses. That means no concerts, no plays, no sporting events, etc. Not even if it’s part of a business meeting or discussion. Having Apple buy up a stadium and bring a big-name entertainer to a convention – not deductible.
SmallBizLady: What about meals? We still get to deduct those, right?
TaxMama: There are some changes to the deductions for meals. We still get to deduct our meals when we go out with a client. If we just send them out to dinner on us – no deduction. We must be present with them.
We got one carrot – when it comes to entertainment events. If you separate out the cost of the meal, you can still deduct that part of the cost. Be sure to get a separate invoice from the facility’s provider.
Another thing we lost with the new tax law: employers who provide on-site meals (lunches, breakfast, dinner for late workers, etc.) used to get a 100% deduction for the cost of those meals. That has been cut to 50%. But if we have a special event, like the occasional company picnic, that’s still 100% deductible.
SmallBizLady: Let’s get back to businesses – some people are talking about becoming C corporations with that new low 21% flat tax rate. Is that a good idea?
TaxMama: For some people, especially those with a long-term plan for their businesses, corporations might be a great idea. With the right planning and finessing, the amount of profit, retirement benefits, wages, and dividends, you could end up paying less tax than you have been paying for the business.
For someone who’s planning to take their business public, C corporations are the best way to go, for many reasons. But the tax reason? If you do it right, you can avoid paying taxes on up to 10 MILLION DOLLARS of capital gains when you sell your stock. However, if you don’t set it up correctly from the very beginning, you’ve blown this special benefit.
If you enjoyed this interview, please join us live on Twitter every Wednesday from 8-9 pm ET. Just follow the hashtag #Smallbizchat, and don’t forget to follow @SmallBizChat on Twitter.
Click here for directions to join the weekly conversation.